De Crash Course 15 & 16
Deze crash course gaat over de veranderingen die de maatschappij te wachten staan. Economische, maar ook maatschappelijke. De focus is uit de aard van de herkomst op de USA, maar ook voor West-Europa bevat het nuttige lessen. Komende weken zullen we er met regelmaat een aantal toepasselijke lessen uit (her)publiceren.
NB: de link naar de gesproken tekst zit onder de link waar de duur staat aangegeven!
Engelstalige transcriptie Chapter 15 – Demographics
One of the great challenges that much of the developed world faces is demographics – the age structure of their populations does not align very well with entitlement and pension programs, or the idea of financial asset markets climbing ever higher.
To begin, recall that the US government has not funded any of its entitlement programs. As we calculated, it has a massive shortfall in them measuring in the tens of trillions of dollars.
From as “little” as $55 trillion according to the Treasury Department, or as much as $220 trillion according to Boston University’s Laurence Kotlikoff.
The situation we find ourselves in was largely inevitable because our entitlement programs are actually wealth transfer programs, not savings accounts, and they depend on a significant surplus of current workers to retirees.
The shortfalls in these programs are being exacerbated by a troubling trend. In 1950 there were seven workers per retiree and the system was more or less in balance.
By 2005, that ratio had dropped to only 5 to 1 and the system was already exhibiting signs of distress.
By 2030 that ratio will have plummeted to a thoroughly unworkable value of less than 3 to 1.
These predictions are not hard to make, nor are they very disputable. They’re made using simple math based on the so-called ‘Baby Boom’ that occurred after WW2.
This is a demographic chart of the United States. Each bar represents a clustering of all the people who are within a five year wide ‘age window’ as seen on the left axis, and shows how many millions of them there are along the bottom axis.
The baby boomers number around 75 million strong and roughly occupy these four bands.
While it may not seem like much, the ‘hole’ that exists in the population behind the baby boomers represents an enormous challenge – in fact, we can call it a threat — to our entitlement programs.
This hole will greatly complicate our efforts to resolve our levels of debt and address our national failure to save.
If we cast back to the year 1900, we can see a more ‘normal’ population distribution.
It resembles the kind of distribution that humans evolved with over countless millennia; and it looks like this: A pyramid.
Again, this shows five-year wide age brackets, with men in red and women in yellow.
This distribution is capable of supporting an entitlement program such as the one in the US that is based on transferring wealth directly from current workers to retirees.
But when we cast this chart forward to 2000, the baby boomer bulge is quite apparent.
Besides the challenge that this demographic imbalance offers to our entitlement programs, an even larger challenge is presented to both the debt and savings issues I painted in previous chapters, and even to the value of our assets.
Here’s what I mean.
The boomers are the wealthiest generation ever, they hold nearly all of the assets, and they will need to dispose of those assets to fund their retirements.
Who exactly are the boomers planning on selling their assets to? This guy?
Even if Gen-X and the millennial generations somehow had robust savings – which they don’t — there simply aren’t enough people within these generations to buy all that the boomers currently own – at least not at anywhere near today’s market prices.
So, in order to fund their retirement dreams, boomers are going to have to find buyers for their assets. And again we might wonder “to whom” exactly?
And lastly, as we’ve discussed thorough in early chapters, the massive accumulation of debt over the past 23 years is predicated on the assumption that the future will be much larger than the present.
How exactly will that come to pass if boomers are retiring en masse and there are fewer behind them to take their place?
Man…the next generation better be prepared to work really, really hard! Too bad they are graduating with the highest levels of college debt ever recorded.
And too bad the boomers – many of whom have not saved enough to retire — are hanging onto their jobs for dear life, competing against the very people that they hope will someday buy all of their financial and real estate assets from them.
In fact, the over 55 crowd has not only weathered the Great Recession without any job losses, it gained 4 million jobs over the past 5 years.
That means that the over 55 crowd has taken over half of all new jobs that have been created since the recovery in the job market beginning in early 2010.
After we subtract the over 55 crowd, just 3 million jobs were taken by those younger than 55 over the same time period.
The reason this really matters is that people typically hit their peak earning years between the ages of 35 and 55.
To the extent that boomers are hanging onto their jobs, and almost certainly they are doing this for very understandable economic and financial reasons if not desperate necessity, we might anticipate that younger folks who should be in their peak earning years are unable to hit their own stride,
It’s a simple story of competition. In this case, between generations.
Again, the point to be reinforced here is that financial assets go up in price when there are more buyers than sellers – a case that was true for the boomer bulge between the years 1988 and 2001.
Boomers hit their stride, took their earnings and bought stocks and bonds, and – voila! — we had bull markets in both stocks and bonds the entire time.
Of course, the math works the same in the other direction, as well.
Prices go down when there are more sellers than buyers which, given the sheer number of baby boomers entering their senior years and needing to liquidate savings for living expenses, virtually guarantees there will be a glut of sellers in the market for the next couple of decades.
This harsh math is compounded by the other additional factors locking younger generations out of the job market, such as outsourcing and automation.
Younger workers – the ones who are supposed to pony up for all the assets the boomers need to sell – are being forced to settle for a worse job market, with fewer jobs and lower real wages than their predecessors enjoyed. This is not a recipe for prosperity for either generation.
And this demographic friction will be with us for decades to come. It cannot be wished away or fixed by some new policy.
It is simply a fact of life and one that we’d do well to recognize and plan for rather than ignore.
10,000 baby boomers reach retirement age every day. And this pool of aging seniors the will accelerate rapidly over the next 15 years – in fact, its influence has already begun making the twenty-teens quite interesting.
This new reality is one of the central reasons I predict the next 20 years will be completely unlike the last.
Publicatie 4 juli 2014
Engelstalige transcriptie Chapter 16 – A National Failure to Save & Invest
In prior chapters, we saw that debts and liabilities far exceed assets in the United States.
But it goes one step further than that, because we’ve also failed to save or invest at anywhere close to the levels that are associated with prior periods of national prosperity.
In this chapter I will present evidence that the United States has failed to save money at virtually every level of society and make the claim that investment in national infrastructure is woefully deficient.
My position is that the next twenty years are going to be completely unlike the last twenty years and to support this statement I am going to take you through six key areas of data: Debt, Savings, Assets, Demographics, Peak Oil, and Climate Change. Any one of these could prove economically challenging, but the combination of two or more simultaneously, well, could prove to be more than we can afford.
This is a chart of the personal savings rate stretching back to 1959. The personal savings rate is the difference between income and expenditures for all US citizens expressed as a percentage. So a number like “10%” indicates that for every dollar earned, 10 cents was saved, not spent.
Note that the long-term historical average for US citizens between 1959 and 1985 was 9.2%. For comparison in Europe that number is around % and in china a stunning 30% of income is saved.
Savings are important to us individually because they form the cash cushion that gets us through economic difficulties and at the national level because savings are essential to the formation of investment capital; that is, the property, plant and equipment that create actual future wealth.
In fact, true investment capital can only come from savings, not freshly printed money from the central bank – which is a very important point to make.
You may have read or heard recently that the personal savings rate has plunged to historic lows to levels last associated with the Great Depression. In fact, the personal savings rate has steadily declined from 1985 to present indicating that those headlines we just saw were not some very recent blip on the radar, but rather the culmination of a multi-decade erosion of savings as a cultural attribute of US citizens.
However, we are not a nation of averages – and this chart somewhat obscures the fact that the extremely wealthy are saving incredible amounts of money, while at the lower ends the savings rate is deeply negative.
What else can we note about this chart? For starters, a persistently declining savings tells us that there is an implicit assumption by the majority that credit will be available in the future and that we have largely substituted a “save and spend” mentality with a “buy it now on credit” mentality. As we look at this chart we might also note that the savings rate began its decline right around 1985.
Hmmmm….Wait a minute…didn’t we see that same time frame in the section on debt? Yes, yes we did. While this chart is showing ALL debt across all sectors, and the prior chart was of personal savings only, we can note that our national tolerance of debt shifted drastically upwards beginning in 1985 right as our national approach to savings was beginning its long decline towards zero.
In order to believe that the future is going to be bigger, shinier and brighter than the present, you have to believe that low savings and high debts are a path to prosperity, or at least a perpetual feature of our future economic landscape. I am skeptical, to say the least because this just doesn’t make sense to me – it violates several laws of nature.
So the personal savings rate is low, and that’s worrisome again because it means that many individuals have a very thin safety cushion to ride out any economic hardship that might come along.
But as we saw in the prior section on assets and liabilities, corporations, municipalities and the federal government have not been saving either.
So it’s really a nationwide phenomenon.
Saving and investment go hand in hand and according to the American Society of Civil Engineers we’ve fallen short when it comes to investing in our national infrastructure. In 2005 they assessed the condition of 12 categories of infrastructure, including bridges, roadways, drinking water systems, and wastewater treatment plants. They gave the US an overall grade of “D” and calculated that $1.6 trillion dollars would be needed over the next 5 years to bring us back up to first world standards. Since that was in 2005 and inflation for things made out of metal and asphalt has advanced enormously since then, let’s just round this up to an even $2 trillion.
The US is now far behind most other countries when it comes to such things as high quality cell phone and internet service, and there are almost daily reminders that the municipal water pipes are badly in need of repair.
Bridges are crumbling and the electrical grid is far behind modern standards in most regions.
Despite all this, and the stated need to boost the economy, the US government in 2012 spent the lowest amount as a percent of GDP on such things as schools, hospitals, and utilities in any year since this chart began in 1970:
The same is true for all other forms of investment, excluding residential, which tagged an abysmal 0.6% of GDP in 2009, and still remains below 2% in 2013.
And putting it all together we find that a personal failure to save is reflected by a state and local failure to save, which are mirrored by a corporate failure to save, all dwarfed by a failure to save at the federal government level. And capping it all off is a profound failure to invest. All of these deficits lie before us and lead me to conclude that we might as well not worry about them because they simply cannot all be paid. But at the same time we should also adjust our expectations accordingly.
This is our legacy – the economic and physical world that we are choosing to leave to those who follow us and most of these bills will come due, in a big way, in the twenty teens.
How did we get here? How did this happen? As a former consultant to Fortune 500 companies, I saw an explanation for this and it all begins at the top. If the leadership of a company was financially reckless or had a moral disregard for its workers, then this same behavior could be found reflected throughout all the layers of the company.
Our government has pursued a reckless policy of debt accumulation while neglecting saving and investing and so have states, municipalities, corporations and private citizens.
David Walker, former comptroller of the US once said that “The US Government faces deficits in … its leadership”.
The top sets the tone.
This topic should be front and center in every political debate but it is usually nowhere to be found. A failure to invest and a failure to save will inevitably lead to a future that is less prosperous, something we all instinctively know is true. And yet nearly all efforts by the central bank and politicians are centered on boosting current consumption while ignoring savings and investment.
Again, we can note the trend and until and unless it reverses, all we can do is adjust our expectations downwards and prepare for a future of less and less.
Publicatie 4 juli 2014
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